Housing downturn not over - Costello

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The slowdown in the housing market will last for some time,
making it one of the main economic challenges for the coming year,
the Federal Treasurer has warned.

In an interview with the Herald yesterday, Peter Costello
grouped the housing market with the falling US dollar and
historically high oil prices as the biggest obstacles facing the
economy in 2005.

"I would expect the cooling to continue for some time yet, and
that's no bad thing," he said.

In the interview he also: Again attacked the NSW
Government over its vendor exit tax on property investors.
Warned that the economy was not "recession-proof". Reiterated
that the Coalition's election promises would be delivered in full
and played down the possibility of big budget spending cuts to pay
for them. Said he favoured broad income tax cuts, not
targeted ones.

Mr Costello said the housing slowdown had become entrenched
during the year and accused the Carr Government of magnifying the
downturn in NSW. He said it had "blundered into this cooling
market" and made "the adjustment more pronounced in NSW".

The Herald reported yesterday that property sales in
Sydney have fallen to a 15-year low as investors bale out of the
housing market.

An ABN Amro economist, Kieran Davies, believes the slowdown in
the housing market will drag on the economy for several years
as consumers respond by crimping spending. "The housing downturn
will have big second-round effects on spending and jobs because
lots of sectors in the economy run off it," he said. "It will be a
slow adjustment."

The annual economic growth rate slowed to 3 per cent in the
September quarter, and the Reserve Bank said this week that growth
was likely to slip below 3 per cent by the end of the year, much
weaker than previously forecast.

Mr Costello said he would update the Government's growth
forecast for 2004-05 next week in the mid-year budget review. Signs
of weaker growth have raised the possibility of a significant
downgrade in the official forecast from the present 3.5 per
cent.

While Mr Costello was generally upbeat about Australia's
prospects, he said no economy was recession-proof. "There is no
economy in the world that can say 'we will never go into
recession'," he said. "There are risks in every economy including
Australia, that have to be managed."

The US Federal Reserve has announced its fifth monetary
tightening this year, lifting interest rates by a quarter of a
percentage point to 2.25 per cent and flagging further increases,
"at a pace that is likely to be measured".

The Government's expenditure review committee has started
preparing next year's federal budget against this uncertain
economic backdrop. Mr Costello said the main budget priority was to
implement the Coalition's election policies.

"The focus of the budget should be implementing the election
program," he said.

He played down the possibility of big spending cuts to fund
election pledges, although he said he would be looking for
potential savings.

"I think it's incumbent in every budget round to try and reduce
unnecessary expenditures if you can find them ... people expect us
to do that," the Treasurer said. "[But] that is not related to
implementing the election program, full stop."

Mr Costello said the Government would continue to explore ways
to reduce tax, and that he favoured broad-based tax cuts over
targeted ones. "I prefer where you can to try and provide general
incentives," he said.

He categorically ruled out imposing the GST on food - as the
Government originally proposed - after the Coalition gains control
of the Senate next July. "Under no circumstances will we revisit
the GST base," he said.